"Things are Getting Better" I

Since things seem to be hopping here at L&P this week, I thought I would take this chance to inaugurate the first of what I hope will be a number of posts in the upcoming months that track the ways in which the economic circumstances of average Americans are, contrary to the media and other prophets of doom, getting better and better. The media are very good at giving us the bad news, or what they think is the bad news, so I'm hoping to continually catalog the good news that they overlook or that, in the case of today's item, they sometimes stumble across.

I start with, of all places, the front page of today's New York Times (hat tip: Cafe Hayek), with a piece that opens with:

Despite a widespread sense that real estate has never been more expensive, families in the vast majority of the country can still buy a house for a smaller share of their income than they could have a generation ago. A sharp fall in mortgage rates since the early 1980's, a decline in mortgage fees and a rise in incomes have more than made up for rising house prices in almost every place outside of New York, Washington, Miami and along the coast in California.

It continues:

Nationwide, a family earning the median income - the exact middle of all incomes - would have to spend 22 percent of its pretax pay this year on mortgage payments to buy the median-priced house, according to an analysis by Moody's Economy.com, a research company. The share has increased since 1998, when it hit a low of 17 percent before house prices began rising sharply in many places. Although the overall level has reached its highest point since 1989, it remains well below the levels of the early 1980's, when it topped 30 percent.

There are several reasons for this, including the noted increasing incomes (again, contrary to popular myth), but the key is certainly lower interest rates that have enabled monthly mortgage payments to fall as a percentage of income. And, as one interviewee points out, houses today are bigger on average (and he neglects to mention that they have a lot more and better stuff in them - more have central a/c, better building materials, hard-wired smoke detectors, etc.), so families are getting more for their money. Changes in lending practices are noted as another causal factor, as lower down payments have made ownership possible for some even in the face of higher list prices, and efficiencies in the mortgage market are mentioned as well. Home ownership remains at record levels (69 percent) as a result.

This part of the American dream remains within reach of more and more average Americans.

More Comments:

Mark Brady -
12/30/2005

Steve: "I quoted those figures in my post. Frankly, my interest in the "things are getting better" argument is in longer-run phenomena, such as 20 years or more. Too many ephemeral factors can matter there."

I appreciate that your interest is in longer-run phenomena, and certainly the secular trends in the U.S. and abroad are, generally speaking, encouraging. What sparked my original comment was that the data you provided was not germane to your argument.

Steven Horwitz -
12/30/2005

Yup. I make this point as well on my "Get the Good News" stuff on my webpage. If you count total compensation, rather than just money wages, it has grown steadily over the last decade or two, adjusted for inflation. Critics point to the slow decline in average wages, but those are money only. (Note neither of these includes income from capital.)

Sheldon Richman -
12/30/2005

I understand that if you count fringe benefits, median income has not stagnated. Dan Griswold and Alan Reynolds have argued this.

Steven Horwitz -
12/30/2005

It would not include that either. That's not considered income.

Sheldon Richman -
12/30/2005

But what about health insurance?

Steven Horwitz -
12/30/2005

No, Sheldon, I believe that is just cash income. It does include non-wage income, but not things like transfer payments.

Sheldon Richman -
12/30/2005

Does that include noncash benefits?

Steven Horwitz -
12/30/2005

Sheldon: No argument from me. But I still think it's important for libertarians to make the case that the world is, in general and over time, getting better DESPITE but not because of all that government.

Mark: I quoted those figures in my post. Frankly, my interest in the "things are getting better" argument is in longer-run phenomena, such as 20 years or more. Too many ephemeral factors can matter there.

CS: According to Census data, median household income has been flat from 2002-2004. It dipped from a peak in the late 90s, mostly due to the 2001 recession and the economic effects of 9/11. http://www.census.gov/prod/2005pubs/p60-229.pdf p. 3.

Of course flat or falling median household income need not mean that any single household became poorer. The median can fall due to an increase in the number of households where more come in below the previous year's median than above. So, for example, immigrants will tend to come in below the prior year's median, dragging down the median even if every other household became richer. So a falling median is perfectly consistent with the possibility that a large number of US households became richer in the period in question.

Common Sense -
12/30/2005

You refer to median family income. My understanding is that it has fallen each of the past four years. Am I incorrect?

Sincerely,

A Prophet of Doom

Mark Brady -
12/29/2005

According to the New York Times story that you quote, things are NOT "getting better" with regard to the cost of housing. Since 1998, the story tells us that they have gotten worse! In respect of the particular measure that the Times cites, things may be better than they were in the early 1980s but more recently they have gotten worse and we're back to the position in 1989.

Sheldon Richman -
12/29/2005

And how much better would things be minus all the ways government increases the price of houses?